Pain and gain of Brexit

Few events outside of war can have quite as much potential impact on the economy of a country as Britain's decision a year ago to leave the European Union.

Since the momentous vote on June 23, 2016, the British economy defied the gloomy recession predictions of many, including the British Treasury and the International Monetary Fund. Other forecasts like an immediate house price crash didn't materialize either.

But other predicted events did occur, such as a sharp fall in the pound and rising inflation.

And now that the official two-year Brexit process has begun, there are renewed signs of economic pain.

So where is the British economy, one year later?

The British economy did not contract in the wake of the Brexit vote as many had warned. In fact, for much of the time since, it's grown faster than many of its peers in Europe, largely because of a sharp fall in the value of the pound. After sliding 15 per cent, the pound's performance is the worst among major currencies versus the dollar over the past year.

The 15 per cent decline made exports cheaper, a boon to growth. However, the economy is now weakening amid the Brexit uncertainty and the pound's drop makes imports more expensive.

The British economy is even trailing the likes of Greece - Britain grew by a quarterly rate of 0.2 per cent in the first three months of the year, lower than any economy in the Group of Seven industrialized nations. At the same time, previously struggling continental economies like France have gained momentum, potentially affecting the dynamics of the Brexit talks, which started last week.

The worry is that the pre-Brexit doom-mongers may be proved right should Britain crash out of the EU without a comprehensive trade deal - the so-called "hard" Brexit scenario.

Ratings agency Standard & Poor's says Britain has the most to lose economically as it exports more to the EU, when calculated as a proportion of the economy, than any other country. The risk, it says, is magnified by the fact that the services sector, such as banking, accounts for a significant chunk of those exports. And services are less likely to be covered in any immediate trade deal to retain privileged access to the massive EU market. Any early post-Brexit arrangements may just be confined to goods.

Given its central role in the European financial sector, London's fate is uncertain. When Britain leaves the EU, British financial services companies would lose the automatic right to operate in all the other 27 EU states, a big handicap. A recent survey from consultancy EY found that the capital was losing ground as one of the three most attractive cities in Europe for business. The city's global status, including its deep pool of skilled professionals like lawyers and accountants, will help cushion the blow, as will something as basic as the English language.

"London is still top dog but it's clearly losing ground," said Moritz Kraemer, S&P's chief rating officer.

The pound suffered the first and biggest hit from the Brexit vote, dropping nearly 20 cents from its pre-vote level of around $1.50 the day after the referendum.

"You could have bought any major currency - even the Turkish lira - against the pound that day and be significantly in the money today," quipped Kit Juckes, a strategist at French bank Societe Generale.

In the year since the vote, it's fallen further to 31-year lows before making a modest recovery to trade at $1.27 a year on. While that helped exporters, it's proved costly to others by making imports, such as energy and food, more expensive. In the year to May, inflation rose to a four-year high of 2.9 per cent, way up on the 0.3 per cent it was when Britain voted for Brexit.

The pinch was felt immediately by British holidaymakers, many of whom will have done a double take upon seeing their credit card statements on their return home. Now the costs are being felt at home, too, and retail sales are faltering as wages fail to keep up with prices.

It may seem counter-intuitive but Britain's main stock index, the FTSE 100, has actually hit a series of all-time highs, spiking by around a quarter following an initial drop - not a bad return for any investment. That's partly due to the export-boosting impact of the pound's drop.

The FTSE 250 Index of mid-caps - seen as more reliant on the domestic economy than the larger gauge - is up 13 per cent in the same period, with most of its advance coming in 2017. In dollar terms, however, it's down three per cent.

Many international companies, like Burberry, are listed on the FTSE 100, meaning that their earnings in dollars and other non-British currencies are worth more when translated back into pounds. Other international companies like miners Glencore and Antofagasta have also benefited from commodity price rises.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, noted that "all of the top 10 performing stocks have significant international earnings" while more domestic-geared stocks, particularly those in retail, like Next, have suffered.

The share price of Dixons Carphone fell so much, largely because of Brexit-related uncertainties and the fall in the pound, that the electronics retailer dropped out of the FTSE 100 index.

Meanwhile, the European Central Bank is asking for legal powers to oversee how transactions involving financial derivatives are settled - a hot topic in negotiations over Britain's departure from the EU.

The ECB said on Friday it has asked EU authorities for "clear legal competence" to regulate clearing of derivatives.

Clearing centres act as intermediaries in the buying and selling of derivatives, which are financial contracts that derive their value from an underlying asset such as oil, gold or currency. Much of the activity in clearing euro-denominated derivatives is located in London and involves thousands of jobs in the financial sector.

The European Commission has proposed that clearing houses considered important to the EU financial system accept regulation from the bloc and if requested move to within the bloc.EU leaders agreed on Thursday that the post-Brexit locations of key bank and medical agencies currently based in London would be decided by November, EU president Donald Tusk said.

"Agreed. EU27 will decide by vote in November on relocation of EU agencies currently in UK. Confirms EU27 unity. Reduces Brexit uncertainty," Tusk tweeted after a summit meeting in Brussels.

The post-Brexit future of the European Banking Authority (EBA) and the European Medicines Agency (EMA) is important in itself, given their key regulatory role.

But it is also a matter of money and prestige, with most of the remaining 27 EU member states vying to provide their new home.

So far the EMA candidate cities are Amsterdam, Copenhagen, the northern French city of Lille, Stockholm and Barcelona.

The German financial hub of Frankfurt is the frontrunner to host the EBA, while Luxembourg, Paris and Prague are also in the race.

Vienna, Dublin and Warsaw have also put themselves forward as candidates for both agencies.

Source: .khaleej Times